1 Introduction

Indonesia is the fifth most populated country in the world and
is a major producer of agricultural products. The islands of Java and Bali
account for only 7 percent of Indonesias total land area but 60 percent of
the population. Agriculture is very intensive on these islands, with up to three
crop rotations per year. Off Java, soils are less fertile, and agriculture is
less intensive. The major food crops, ranked by area harvested, are rice, corn,
cassava, soybeans and peanuts. Indonesia is also one of the worlds largest
producers and exporters of tree crops such as rubber, copra, palm kernels, palm
oil, coffee, cocoa and spices (Ministry of Agriculture, 2001).

The Government of Indonesia has made a great effort to
integrate the Indonesian economy into the world economy. The process began in
the mid-1980s and accelerated in the 1990s when the Government reduced
international trade barriers substantially and opened up the economy to foreign
investment. The impetus for Indonesias market opening measures was the
sharp drop in oil prices. The objective was to restructure the economy by
diversifying the trade sector away from its heavy dependence on oil.

Government policies were highly successful at attracting
foreign investment into light, labour-intensive export industries and led to the
rapid growth of Indonesias manufacturing sector. One consequence is a
declining share of agriculture in the total economy. In 1985, the share of
agriculture in the GDP stood at 23.2
percent.[63] By 2000, that share had fallen to
16.9 percent.

Although agricultures importance has declined, it
remains critical to the overall health of the Indonesian economy. In 2000, for
example, agriculture still absorbed 45.1 percent of the Indonesian labour force.
Even more importantly, agriculture provided a cushion against the effects of the
Asian economic crisis. Agriculture depends less on the formal financial system
than other sectors and was therefore less affected by the collapse of Indonesian
banks. Furthermore, the massive devaluation of the Indonesian rupiah caused a
large adjustment in relative prices in favour of traded goods, such as
agriculture. One consequence is that even though real GDP declined by 8.3
percent between 1997 and 2000, agriculture expanded by 3.0 percent.

Indonesias policy objectives for agriculture have
evolved in response to the changing economy. These objectives are now far more
complex than they were 25 years ago. Some examples of Indonesias more
important objectives are:

Diversification,
which has long been a goal of agricultural policy, has taken on a broader
meaning to include expanding the types of employment opportunities available in
rural areas.

A priority for trade policy is
to enhance Indonesias industrial competitiveness and to move up the
value-added processing chain. This is particularly the case for natural
resource-based sectors such as agriculture where exports are still highly
concentrated in primary products.

As in other countries that
have experienced rapid economic growth, Indonesia now attaches far more
importance to protecting farm incomes. Twenty-five years ago, low food prices
for consumers were a major objective of the Government. Now, some argue that
high prices for producers are of equal importance.

As a result of the economic crisis, poverty in Indonesia
nearly doubled from 15.7 percent of the population in 1996 to 27.1 percent of
the population in 1999 (World Bank, 2001). Although poverty has since returned
to pre-crisis levels, a significant proportion of the Indonesian population
remains at risk. According to the World Bank, poverty is the development
challenge facing Indonesia today.

Indonesias policy objectives can lead to inherent
contradictions, particularly when price policy is the only policy instrument
that is used for several objectives. Achievement of one objective through price
policy can have negative consequences for others. This poses a dilemma for the
Government and can make it more difficult to develop a clear strategy for the
agricultural negotiations in the WTO.

2 Experience in implementing the
agreement on agriculture

As noted in the Introduction, Indonesia began to open up its
economy in the late 1980s. Trade policy reforms were implemented through a
series of deregulation packages that were issued at least once each year and
which aimed at converting non-tariff barriers into tariffs, rationalizing and
reducing tariffs and removing restrictions on foreign investment.

An important feature of Indonesias reforms is that they
were for the most part undertaken unilaterally. With few exceptions,
Indonesias international trade policy commitments, such as those with the
WTO, Association of South East Asian Nations (ASEAN) and Asia-Pacific Economic
Cooperation (APEC), serve only to complement reforms that Indonesia had in any
case decided to undertake unilaterally. Exceptions are Indonesias
commitments to the IMF. Under the structural adjustment component of its 1998
Letter of Intent (LOI) with the IMF, Indonesia committed to a large number of
trade policy reforms. Some of these reforms go further than what Indonesia had
decided to undertake unilaterally, and to what it had agreed to
internationally.[65] This is particularly the
case for agriculture.

Non-tariff import barriers

Initially, Indonesias trade reforms focused on import
licensing restrictions. In 1990, such restrictions affected more than 1000 items
in Indonesias tariff code. By 1996, the number of products requiring
import licences had fallen to 200. The number has since declined even more as
Indonesia implemented its WTO commitment to eliminate all NTBs for commodities
bound in the WTO.

For agriculture, Indonesia bound 100 percent of its tariff
lines as required during the UR and must eliminate all agricultural NTBs. By the
time the UR agreements were implemented, however, many of the licensing
restrictions affecting agriculture had already been removed. Those remaining
consisted of:

Local content
rules for soybean meal and dairy products. Indonesia agreed to eliminate these
in three and ten years, respectively. Local content rules were actually
eliminated soon after implementation of the UR agreements.

Licensing restrictions on
alcoholic beverages. These restrictions remain today. Since alcoholic beverages
are classified as agricultural commodities, they may eventually have to be
eliminated unless Indonesia is granted special
exemptions.[66]

Sole importer licences granted
to public agencies. Indonesia had granted sole import rights for rice, soybeans,
sugar, wheat, wheat flour and garlic to BULOG, the National Food Logistics
Agency.[67] Sole import rights for cloves were
granted to the BPPC, a cloves marketing agency.

Indonesia notified the WTO that both BULOG and BPPC operate as
state tradingenterprises (STEs) within the meaning of Article XVII of GATT. As a
result, Indonesias WTO commitments for these commodities are to ensure
that import purchases are non-discriminatory and that the margin between the
domestic price and world price falls within the tariff binding for each
commodity. There may have been a few occasions (e.g. sugar) where the margin
between the domestic price and world price has been close to Indonesias
bound rate.

With the exception of soybean meal and dairy products, the UR
has not caused any changes to Indonesias import licensing regime for
agricultural commodities. Of far more significance was Indonesias 1998 LOI
with the IMF. Under the LOI, the Government agreed to phase out all import
licensing restrictions that could not be justified for health, safety,
environmental or security reasons. This included NTBs for industrial commodities
that were not bound in the WTO, BPPCs import monopoly for cloves and all
BULOG import monopolies. The only exception was rice.

Although Indonesia was not required to eliminate BULOGs
monopoly over rice imports, Indonesia later opened up rice trade to the private
sector as well. BULOG can still trade in rice and other commodities, but it no
longer has the sole import right for any commodity. As discussed later, BULOG
continues to have a role in domestic price stabilization and the distribution of
rice to the poor.

Although Indonesia eliminated BULOGs import monopoly for
sugar as required by the IMF, it later introduced new licences that restrict
imports to sugar processors. Under WTO rules for STEs, BULOGs sole import
licence for sugar may have been permitted. Under WTO rules for tariffication,
the newest licences might be classified as NTBs and have to be
eliminated.

Tariffs

During the UR, Indonesia bound 92 percent of all industrial
tariff lines and 100 percent of all agricultural lines. For agriculture, the
number of bound tariff lines increased to 1 500 compared with only 65 before the
Round.

For industrial commodities, most tariff bindings are an
across-the-board 40 percent. For agriculture, the bindings are far more variable
and are much higher, averaging more than 70
percent.[68] The average bound rate for
agriculture is to be reduced by 24 percent before 2005, with a minimum reduction
of 10 percent per tariff line. Some of the highest bound rates are for items
that were subject to nontariff import barriers or were once under the control of
BULOG (Table 1).

As was the case for non-tariff import barriers, the UR has had
very little impact on Indonesias applied tariffs. In 1995, the simple
average tariff for agriculture was 16 percent and was well below the average
bound rate. There were only a few commodities where applied and bound rates were
approximately equal. Most of these commodities had been bound at fairly low
rates during earlier rounds of GATT negotiations.

Alcoholic beverages are exceptions. Bound rates for alcoholic
beverages must be reduced from 170 percent to 150 percent by 2005. Since applied
rates are currently equal to 170 percent, they will eventually have to be
reduced as well in order to keep them at or below bound rates.

In May 1995, Indonesia announced a long-run tariff reduction
package (Pakmei 95), which was of far greater significance to tariffs than
the UR. This package lays out a schedule of annual tariff reductions, where the
reductions each year are based on the level of tariffs before May 1995 (Table
2). The final year of the package is 2003, when there would be a three-tiered
tariff structure of 0, 5 and 10 percent.

The Pakmei schedule is meant only to be a guide to future
tariffs.[69] Furthermore, some tariff lines are
exempt from the schedule and have higher long-run targets. This is particularly
the case for agriculture. Some 300 tariff lines, or approximately 20 percent of
all agricultural lines, are exempt from the schedule. Many of these lines
pertain to fruits and vegetables. As a result, the average tariff for
agriculture would be 13.2 percent in the final year of the schedule. This
compares with an average of 7.2 percent for all tariff lines.

Table 2. Indonesias tariff reduction schedule
(1995-2003)

Tariff before May 1995

1995

1996

1997

1998

1999

2000

2001

2002

2003

(%)

(%)

(%)

(%)

(%)

(%)

(%)

(%)

(%)

0

0

0

5

5

Max 5

10

5

Max 5

15

10

5

Max 5

20

15

10

5

Max 5

25

20

15

10

Max 10

30

25

20

15

10

Max 10

35

30

25

20

15

10

Max 10

40

30

25

20

15

10

Max 10

>45

30

25

20

15

10

Max 10

Indonesias LOI with the IMF has resulted in a much
faster pace of tariff reductions for agriculture and to tariffs that are lower
than those envisioned under Indonesias Pakmei schedule. To reduce the
inflationary impact of the rupiah depreciation on food prices, the Government
agreed to reduce all food tariffs to 5 percent in February 1998. Tariffs on all
non-food agricultural items are also to be reduced, but in stages of 5
percentage points each year. The long-term target for non-food agricultural
tariffs is a maximum of 10 percent by 2003. As a result of the LOI,
Indonesias average tariff for agriculture is now close to 5 percent. This
is much lower than the Pakmei target of 13.2 percent in 2003.

Rice and sugar are exempt from Indonesias IMF commitment
of zero tariffs for food items. Initially set at zero, the tariffs on rice and
sugar were raised when BULOGs monopoly over imports was eliminated.
Currently, there are 20 to 25 percent tariffs on the various types of sugars.
These tariffs were to be reduced over three years in conjunction with a plan to
restructure the sugar processing industry, including the closure of inefficient
state-owned sugar mills. In the case of rice, the tariff was set in specific
terms at Rp430/kg through August 2000. At that time, the ad valorem
equivalent of the specific tariff was estimated to be 30 percent. Although
meant to be temporary, the tariffs on sugar and rice are still in
effect.

Regional trade agreements

Indonesia is a founding member of the ASEAN and participates
in the ASEAN Free Trade Area (AFTA). With few exceptions, AFTA tariffs on
intraregional trade are to be reduced to between 0 and 5 percent by 2002.
Initially, 20 percent of Indonesias tariff lines were excluded from AFTA
reductions. Now, only 1 percent are excluded. The excluded lines pertain mostly
to dangerous items and alcoholic beverages. Tariff reductions for certain
sensitive items, such as rice and sugar, are delayed until some time after
2002.

Reductions in Indonesias AFTA tariff rates have closely
followed reductions in MFN rates. As a result, the margin of preference for
Indonesias ASEAN trading partners has remained fairly small at about 2.5
percent. The margin is probably even smaller for agricultural commodities
because of the sharp reduction in tariffs required by Indonesias LOI with
the IMF. Since most ASEAN trade is with non-ASEAN countries, the impact of AFTA
on Indonesia and other ASEAN countries has probably been small
(Feridhanusetyawan and Pangestu, 2001).

Special access commitments (tariff rate
quotas)

During the UR, Indonesia agreed to special access commitments
for rice, 70 000 tonnes at tariffs of no more than 90 percent, and dairy
products, 414 700 tonnes in milk equivalent at tariffs of no more than 40
percent. Indonesia did not set up special procedures to administer its tariff
quotas. In the case of rice, BULOG had an import monopoly and thus had the
responsibility for all imports, including those within the quota. For dairy,
Indonesia already operated a local content system under which domestic and
imported milk were mixed in a fixed ratio. Quotas were allocated using milk
absorption certificates that were based on the amount of domestically produced
milk used in processed products.

Indonesias markets for rice and dairy are now fairly
open. BULOG no longer controls rice imports, and the local content scheme for
dairy has been eliminated. As a result, rice and dairy products may be brought
into the country by general importers at tariffs, or tariff equivalents, which
are less than the in-quota tariff rates. As a result, no special quota
arrangements are necessary. Since implementation of the AoA, Indonesias
imports of these products have been well in excess of the quota
amounts.

The special safeguard and other trade
remedies

The AoAs special safeguard is available only for those
commodities where nontariff import barriers were eliminated and replaced by
tariffs. Since Indonesia had very few NTBs to eliminate, it could avail itself
of the special safeguard in only a few cases. According to Indonesias WTO
Schedule of Commitments, the special safeguard is only available for dairy
products and cloves. Since implementation of the Uruguay Round Agreements,
Indonesia has not used the special safeguard.

Indonesias Custom Law of 1995 authorizes the Government
to take antidumping and countervailing duty actions provided that those actions
are consistent with WTO rules. In the following year, the Government introduced
new anti-dumping and countervailing duty procedures and established a trade
remedies unit under the Minister of Finance and the Minister of Industry and
Trade. Safeguard procedures have also been drafted but have not yet been
approved by the President. To date, about 14 anti-dumping petitions have been
filed. Only one of these involved an agricultural commodity - wheat flour.
Although there was a positive finding of dumping and injury in the case of
flour, the Government has delayed the imposition of duties pending further
investigation of Indonesias national interest.

2.2 Domestic supports

Indonesia maintains a number of domestic programmes that are
classified as domestic supports under the AoA. These include general services,
programmes to promote agricultural development (research, extension, etc.),
stockholding and administered price systems for some commodities, and domestic
food aid.[70] With the exception of
administered prices, most of these programmes appear to fall either under the
Green Box or under Special and Differential Treatment, and need not be reduced
as a result of the AoA. Indonesias Green Box programmes, as notified to
the WTO, are listed in Table 3.

Table 3. Indonesias Green Box
measures

Type of measure

Monetary value of measure (billion rupiah)

1995

1996

1997

1998

1999

2000

General services

366

407

557

622

826

1 057

Payments for natural disaster relief

3

4

5

12

15

127

Domestic food aid

-

-

-

411

426

3 055

Public stock holding of food security

32

38

56

265

347

33

Total in rupiah

401

450

618

1 310

1 613

4 272

Exchange rate (Rp/US$)

2 249

2 342

2 909

10 014

7 855

8 421

Green Box (US$ million)

178

192

212

131

205

507

Source: Indonesias Notification to the WTO
on Domestic Supports.

There are many loopholes in the Domestic Support section of
the Agreement; as a result, most countries are not required to undertake policy
changes that reduce domestic supports. Indonesia, however, did not offer a
commitment on the total value of support to agriculture (AMS) and
consequently cannot provide support in excess of the de minimis standard
to any single product. Since Indonesia has developing country status
under the Agreement, that standard is 10 percent. As noted below, there may be a
few cases where domestic support has exceeded the standard. By failing to commit
on the total value of support, Indonesia might therefore be subject to greater
disciplines than countries that did make such a commitment, even though those
countries provide far greater levels of support.

Some of Indonesias more important domestic support
programmes are as follows.

Domestic food subsidies

In response to the economic crisis, the Government introduced
a special distribution programme for rice in 1998. Under the programme, up to 20
kg of rice is distributed monthly to needy households at a price that is
considerably below the market price. The number of target families was
originally set at 7.4 million, but this has since been raised to 16.8 million.
There are now proposals to double the programme budget to compensate the poor
for reductions in fuel subsidies and to make various administrative improvements
so as to eliminate leakage and ensure better targeting of the poor.

Administered prices

Under the Domestic Support section of the AoA, any policy
system that provides price support to farmers could be subject to reduction
commitments. Indonesia maintains administered prices for sugar and rice. If the
administered price for either of these commodities exceeds the world reference
price by more than 10 percent (after taking transport and taxes into account),
the de minimis standard for a single product would be exceeded. It is
probably the case that Indonesias administered price for rice exceeds the
de minimis standard. However, the Government lacks the resources to
support domestic prices at the administered level. In other words, the system
has been ineffective at providing farmers the full support implied by the
administered price.

Government stockholding

BULOG operates a stockholding programme for rice that is
linked to the administered price system and involves seasonal rice purchases.
Although the AoA permits government stockholding for the purpose of food
security, the rules are unclear. On the one hand, government stockholding for
food security is permitted and is a Green Box measure. On the other
hand, stockholding is amber if it provides price support to farmers.
Indeed, most programmes accumulate stocks when prices are at their lowest in
peak harvest months, and thereby provide price support to farmers. Finally,
stockholding could be red if it involves exports from stocks at less
than the purchase price.

2.3 Export policies

Export subsidies

Indonesia has very few programmes that might qualify as export
subsidies. In the 1980s, Indonesia operated a generally available export credit
programme that has since been eliminated. In the late 1980s and early 1990s,
there were occasions when BULOG needed to reduce stocks and exported surplus
rice at less than the domestic price. At that time, Indonesia was more or less
self-sufficient in rice, exporting in some years and importing in
others.

In order to allow policy-makers as much flexibility as
possible in regard to the future disposal of stocks, Indonesia decided to make a
commitment on export subsidies. Export subsidies for rice were bound at ceiling
amounts of US$28.3 million and 299 750 tonnes in 1995, declining to US$21.5
million and 257 785 tonnes by 2004. Since implementation of the AoA, Indonesia
has not subsidized exports of rice.

Restrictions on exports

Under its LOI with the IMF, Indonesia agreed to eliminate
nearly all restrictions on exports. In the case of agriculture, this includes
export taxes on leather and a ban on exports of palm oil. The latter was
replaced with an export tax of 40 percent, which is to decline eventually to 10
percent.[71]

2.4 Sanitary and phytosanitary standards

In 1996, Indonesia introduced a new law on food safety, which
covers labelling and packaging requirements, food additives, pesticide residues
and other contaminants (USDA, 2000). In 1999, Indonesia also introduced a
Consumer Protection Act, which includes provisions on the retail sale of foods.
Although comprehensive, both of these laws are general in nature, and
regulations need to be implemented before they can be enforced. For example, a
producer of genetically engineered foods must ensure that the product is safe
for human consumption and must label the food as GENETICALLY
ENGINEERED, but further regulations and guidelines on genetic engineering
have yet to be issued.

In addition, most processed food imports must be registered
with the Department of Health and may require certificates referring to the
degree of radiation, standards on Islamic purity (Halal), food
additives, food safety and alcoholic content. With the exception of a recent
case on chicken legs, there appear to be few instances where Indonesian
standards have been used to discriminate against imports. Rather, importers have
complained about the overall efficiency of the registration process. There are
also complaints that an otherwise routine import approval process
has been used to block imports of meat in times of local surpluses.

In the case of chicken legs, Indonesias Ministry of
Agriculture had banned imports of US chicken legs on the grounds that they were
not produced in accordance with Islamic practices. Although still under review,
the Government may decide to rescind the import ban and instead will protect the
domestic market by raising tariffs on chicken legs.

2.5 Trade-related intellectual property
rights

During the past couple of years, Indonesia has enacted and
amended its laws on copyrights, patents and trademarks. In 2000, new laws were
also enacted on trade secrets, industrial design, integrated circuits and plant
varieties. Although questions remain concerning the compliance of Indonesian
laws with the TRIPS Agreement, Indonesias trading partners appear mostly
concerned with the implementation and enforcement of those laws. There have been
no major issues with respect to the protection of plant varieties.

3 Experience with food and
agricultural trade

Indonesia is traditionally a net exporter of agricultural
products (Table 4). During the latter half of the 1980s, the agricultural
surplus ranged from US$1 200 to US$1 500 million per annum. By the latter
half of the 1990s, however, the surplus had fallen to US$900 million per
annum. The decline was due mostly to a sharp turnaround in the food balance.
Net exports of foods fell from a surplus of US$500 million in the late 1980s to
a deficit of US$900 million in the second half of the 1990s.

Table 4. Agriculture and food trade (annual
averages)

Period

Imports

Exports

Net exports

Agriculture

Food

Agriculture

Food

Agriculture

Food

US$ million per annum

1984-1986 (A)

985

589

2 488

1 243

1 503

654

1989-1991 (B)

1 775

911

2 962

1 329

1 208

418

1994-1996 (C)

4 545

2 963

5 414

1 987

869

-976

1998-2000 (D)

4 145

2 901

5 045

2 038

900

-863

Per annum growth rates

Period A to C

16.5

17.5

8.1

4.8

-

-

Period C to D

-2.3

-0.5

-1.8

0.6

-

-

Source: FAOSTAT.

3.1 Agricultural exports

Indonesias major agricultural exports consist of
products of tree crops, including palm and coconut products (33.8 percent),
rubber (18.6 percent), coffee, tea and spices (25.9
percent).[72] Indonesia has also had some
success at diversifying into higher valued fruits and vegetables (5.8 percent).
Together, these four product categories accounted for 84.0 percent of all
agricultural exports in 1998-2000.

Indonesias food and agricultural exports grew at 4.8 and
8.1 percent per annum, respectively, between 1984-1986 and 1994-1996
(Table 5). Since then, food exports have increased only slightly, whereas total
agricultural exports have declined. This has been a major concern of the
Government, which had hoped that the huge devaluation of the rupiah would lead
to an export-led recovery from the economic crisis.

Table 5. Indonesian agricultural exports

Period averages

Annual percent change

1984-86

1994-96

1998-2000

B over A

C over B

(A)

(B)

(C)

Animal/vegetable oils

Value (US$ million)

249

1 413

1 705

19.0

4.8

Quantity (thousand tonnes)

696

2 693

4 461

14.5

13.4

Unit value (US$/tonne)

357

525

382

3.9

-7.6

Rubber

Value (US$ million)

753

1 676

936

8.3

-13.6

Quantity (thousand tonnes)

951

1 306

1 490

3.2

3.4

Unit value (US$/tonne)

792

1 283

628

4.9

-16.4

Coffee, tea, spices

Value (US$ million)

1 017

1 274

1 305

2.3

0.6

Quantity (thousand tonnes)

469

763

957

5.0

5.8

Unit value (US$/tonne)

2 170

1 670

1 364

-2.6

-4.9

Fruits/vegetables

Value (US$ million)

70

327

294

16.6

-2.6

Quantity (thousand tonnes)

540

1 054

728

6.9

-8.8

Unit value (US$/tonne)

130

310

403

9.1

6.8

Food exports (US$ million)

1 244

1 987

2 038

4.8

0.6

Agricultural exports (US$ million)

2 488

5 414

5 045

8.1

-1.7

Source: FAOSTAT.

As indicated in Table 5, declining commodity prices are one of
the main reasons for Indonesias poor export performance in recent years.
Unit values for Indonesias major export products fell precipitously,
whereas most volumes actually increased between 1994-1996 and 1998-2000. The
price declines were particularly severe for rubber. Another factor that may have
contributed to Indonesias weak export performance is the structural
collapse of Indonesias trade finance system. Massive bank failures and
increased Indonesian country risk caused the complete collapse of
local and international trade finance mechanisms during the early years of the
crisis (Brown and Magiera, 2000). Increased commercial risk might also have led
to risk discounts and lower dollar prices for Indonesian exports.

Indonesias food and agricultural imports grew rapidly at
17.5 and 16.5 percent per annum, respectively, between 1984-1986 and
1994-1996 (Table 6). It is this rapid expansion of imports that accounts for the
decline in Indonesias agricultural trade surplus. Although imports have
fallen slightly in the last couple of years, so also have exports. Meanwhile,
rice and sugar imports continue to rise, causing the deficit in food
trade.

Table 6. Indonesian agricultural imports

Period averages

Annual percent change

1984-86

1994-96

1998-2000

B over A

C over B

(A)

(B)

(C)

Rice

Value (US$ million)

49

603

836

28.5

8.5

Quantity (thousand tonnes)

159

1 976

2 999

28.7

10.9

Unit value (US$/tonne)

309

305

279

-0.1

-2.2

Other cereals

Value (US$ million)

297

1014

688

13.1

-9.2

Quantity (thousand tonnes)

1 581

4 871

4 327

11.9

-2.9

Unit value (US$/tonne)

188

208

159

1.0

-6.5

Textile fibres

Value (US$ million)

200

875

726

15.9

-4.6

Quantity (thousand tonnes)

174

475

497

10.6

1.1

Unit value (US$/tonne)

1 149

1 840

1 459

4.8

-5.6

Sugar/sweeteners

Value (US$ million)

10

285

417

39.3

10.0

Quantity (thousand tonnes)

25

694

1 735

39.7

25.8

Unit value (US$/tonne)

422

411

240

-0.3

-12.5

Animal feeds

Value (US$ million)

85

402

309

16.8

-6.4

Quantity (thousand tonnes)

376

1 405

1 348

14.1

-1.0

Unit value (US$/tonne)

226

286

229

2.4

-5.4

Oilseeds

Value (US$ million)

118

337

265

11.0

-5.8

Quantity (thousand tonnes)

402

882

1 084

8.2

5.3

Unit value (US$/tonne)

295

382

245

2.6

-10.5

Food imports (US$ million)

589

2 963

2 901

17.5

-0.5

Agricultural imports (US$ million)

985

4 545

4 145

16.5

2.3

Source: FAOSTAT.

Within the non-food category, imports of textile fibres
reflect conditions in the textile and garment industries. Most of the rapid
expansion in these industries occurred during the late 1980s and the early
1990s. The growth in feed imports reflects higher incomes and the resulting
rising demand for poultry. Imports are concentrated in the protein feeds where
Indonesia is traditionally in deficit.

Within the food category, increased sugar imports reflect
long-term structural problems in the Indonesian sugar industry. Sucrose yields
have been declining ever since the 1970s; farmers often find it more profitable
to grow crops other than sugar; and Indonesias expanding food and beverage
industries require a higher-quality sugar than can be produced domestically. The
Government has attempted to restructure the industry by moving cane production
to extensive areas off-Java and by either selling or closing state-owned mills.
However, these efforts now date back more than 20 years and have been
unsuccessful at reducing imports.

Of most concern to the Government has been the increase in
rice imports. During the past decade, there have been two weather-related
increases in rice imports. The first occurred in 1995 and was caused by the
extremely low level of stocks and poor harvest of the previous year. As a
result, rice imports rose from an average of 300 000 tonnes annually in the
early 1990s to almost 2 million tonnes annually in 1994-1996. The second
occurred because of El Niño of 1997 and 1998. This caused rice imports to
rise even more to an average of 3 million tonnes annually during
1998-2000.

Although Indonesia has experienced close to normal weather
during the past few years, production has not returned to trend levels. Between
1985 and 1996, rice production increased by 2.1 percent per annum. This
enabled continued increases in the per capita availability of domestically
produced rice, even though the population grew at 1.7 percent per annum.
Between 1996 and 2002, however, rice production was stagnant. Neither the
acreage harvested nor the yields have shown much change. With continued
population growth, the per capita availability of domestic rice has declined,
and imports have continued at high levels. In 2001, rice imports were about 1
million tonnes. In 2002, they climbed above 3 million tonnes. This has led to
concerns that Indonesia now has a structural deficit in rice (Tabor et
al., 2002).

Indonesias other major cereal import is wheat. Wheat
flour products are a substitute for rice and are consumed primarily by middle-
and high-income households. Imports rose rapidly between 1984-1986 and 1994-1996
but have declined during the economic crisis.

3.3 Tariff reductions and trade

The Indonesian Governments decision to reduce import
barriers has led to concerns about increased imports. Some believe that
Indonesian industries lack competitiveness and cannot compete in a low-tariff
environment. To evaluate this concern, Table 7 compares changes in tariffs with
changes in trade for major commodity groups. The table shows Indonesias
average tariffs for the years 1994 and 1998, and the change in Indonesias
trade surplus (or deficit) between 1994 and 1999, where the change is defined
as:

A positive number indicates that Indonesias trade
situation has improved between 1994 and 1999. A negative number indicates that
the trade situation has deteriorated. As indicated in Table 7, there has been a
substantial reduction in tariffs for all economic sectors. For the entire
non-oil/gas sector, Indonesias average tariff declined by 50 percent -
from 19.6 percent in 1994 to 9.5 percent in 1998. Yet, there are no signs that
this has had a detrimental effect on import competing sectors. On the contrary,
Indonesias trade surplus improved by US$17.7 billion between 1994 and
1999. This reflects the fact that a countrys trade balance is determined
not so much by tariffs, but by macroeconomic factors - particularly the
relationship between savings and investment. The improvement in Indonesias
trade surplus is mostly due to the economic crisis and the decline in imports
that resulted from the movement of foreign savings out of the Indonesian
economy. The results for the agricultural sector are more mixed than those for
the overall economy. The trade balance for the entire agricultural sector
(including fish products) declined by US$900 million. Agricultural sectors with
declining trade balances were rubber, cereals and sugar. In the case of rubber,
the decline was due to a drop in exports - not to an increase in
imports.[75] Only in the case of cereals and
sugar was the deterioration due to an increase in imports.

It is difficult to determine whether protection has increased
or decreased for cereals and sugar since both were subject to non-tariff import
barriers for many years. A rough guess is that protection has increased for rice
but declined for sugar. In the case of rice, BULOG attempted to keep rice prices
at parity with world prices during the early 1990s. Now, the ad valorem
equivalent of the specific tariff on rice is approximately 30 percent. For
sugar, the tariff equivalent of NTBs in the early 1990s may have reached 100
percent. Now, the ad valorem tariff on sugar is 20-25 percent. It would
appear, therefore, that sugar is the only commodity for which decreased
protection is correlated with increased imports.

Source: Lindland (1997). The base tariff wedge is
the difference between the average output and input tariff for each commodity
group in 1986-88. The bound tariff wedge is the difference between the average
WTO bound output tariff and the bound input tariff. Only positive wedges are
used to calculate the averages for each commodity group and for each country. In
other words, negative tariff escalation is excluded from the averages.

3.4 Tariff escalation in foreign markets

As indicated earlier, a major policy goal of the Indonesian
Government is to reduce the dependence on exports of primary products and to
move up the valueadded chain into processed foods. The achievement of this goal
has been frustrated by both internal and external factors. Internally,
processors face high costs for capital, inefficiencies in the domestic marketing
system and difficulties in securing reliable, high-quality supplies of raw
materials.[76] Externally, Indonesia faces
problems meeting the quality standards of foreign markets (see next section) and
traditional trade barriers such as tariff escalation.

In a 1997 study, the FAO found that the UR will result in
reduced tariff escalation for nearly all agricultural products in the EU,
Japanese and US markets (Lindland, 1997). This is illustrated in Table 8, which
shows the gap between output and input tariffs for products of export interest
to Indonesia. With the exception of tobacco in Japan and coffee/cocoa in the
United States, there is a decline in tariff escalation for all products of
interest to Indonesia.[77] For most products,
this decline is lower than the average decline for all products. This may
reflect the fact that the products of interest to Indonesia are mostly tropical
products, which tend to have lower base tariffs than the temperate zone products
produced in developed countries.

Indonesia has faced a large number of anti-dumping and other
trade remedy actions abroad. Although developed countries have initiated most of
the cases, there have been a growing number in the developing countries of Asia
as well. Defending against such actions has required large amounts of resources,
both on the part of the Government and on the part of the private sector. Some
cases are clearly motivated by political pressures in the country initiating the
action.

Anti-dumping actions involving Indonesias agricultural
exports are fairly few in number - tomato paste in Australia, sorbitol in the
EU, canned mushrooms in the United States. There have also been a number of
cases involving downstream products processed from leather and natural fibres.
The Indonesian press reports that several billion dollars of trade may be
affected by anti-dumping and countervailing duty actions. Even though the number
of agricultural cases is small, Indonesian officials are under pressure to solve
the problem and could link results in the negotiations on agriculture to
improved rules on anti-dumping and safeguards.

Indonesia is also concerned about the increasing number of
measures taken to limit agricultural and fish exports for reasons of sanitary or
phytosanitary standards, technical barriers to trade, and the environment
(Figure 1). Indonesian exporters have great difficulty meeting the different
standards of various developed country markets and in tracking changes to the
regulations in those markets. In cases where the regulations appear to represent
an unfair barrier to trade, Indonesia has yet to be involved in a formal WTO
dispute.[78] At the same time, Government
officials argue that bilateral consultations are of little use in resolving
disputes. Indonesia would thus benefit from any changes that lead to improved
transparency and greater harmonization of standards based on internationally
agreed norms.[79]

4 Food security concerns

Indonesia has been very successful at reducing the number of
poor during the past two decades (Figure 2). As a result of the economic crisis,
however, the poverty level rose substantially from 15.7 percent of the
population in 1996 to 27.1 percent of the population in 1999. The problem was
temporary, and poverty has since fallen back to its pre-crisis level. The World
Bank estimates that declining food prices (mostly for rice) explain 41 percent
of the recovery. The remainder was due to rising incomes. Although the situation
has improved, 50 percent of the Indonesian population have incomes of less than
US$2 per day and remain at risk (World Bank, 2001).

Figure 2. Percentage of
Indonesian population below the poverty line.

Source: Indonesian Central Bureau of Statistics.
In 1996, the series was revised. For comparisons, therefore, poverty estimates
under the old and new series in 1996 are provided.

FAO provides a favourable picture of the food security
situation in Indonesia (FAO, 2001). In 1997-1999, the proportion of
undernourished people in Indonesia was significantly below that elsewhere in
Asia. For Indonesia, the proportion was 6 percent. In Southeast Asia and South
Asia, the proportions were 13 and 24 percent, respectively. Of the 99 developing
countries in the FAO study, Indonesia was the third best performer in terms of
reducing the number of undernourished people between 1990-1992 and 1997-1999.
The number of undernourished in Indonesia declined by 5 million over this
period.

Indonesias foreign exchange earnings also appear ample
for covering Indonesias food import needs. Before 1994, the proportion of
food imports in total exports, net of amortization and interest payments on the
public foreign debt, amounted to only 4-6 percent (Figure 3). Although that
percentage has risen since 1995 because of greater food imports, it is still
below 10 percent.[80]

Figure 3. Indonesian food
imports as a percentage of total exports net of payments on the public foreign
debt.

Source: Food imports are from FAO. Total exports
are from Indonesias Bureau of Statistics. Amortization and interest
payments on the public foreign debt are from the Bank of Indonesia.

4.1 Food security and rice

Rice continues to be Indonesias most important
commodity. It is the single most important source of energy and protein in
Indonesian diets and the most important employer in rural areas. For the past
couple of years, there has been a heated debate within Indonesia concerning rice
policy. Food security appears to be at the heart of this debate, where food
security means the adequate domestic production of rice, or rice
self-sufficiency.

Those in favour of rice self-sufficiency argue that it should
be achieved even if it requires domestic prices that are above world prices
(Tabor et al., 2002). High prices can generate positive externalities by
transferring incomes to rural areas, where most of the poor are located, and
promoting rural development. The counter-argument is that rice is a major
consumption item of the poor and that most rice farmers are themselves net
consumers of rice. High rice prices tax the poor and may not be of much net
benefit to rice farmers. Furthermore, high prices may generate little increased
production, since rice farmers are now producing at the technological frontier.
If a price-induced increase in rice production does occur, it will likely be at
the expense of other food crops.

The food policy debate also concerns the types of policy
instruments that should be used to achieve Indonesias rice policy
objectives. Central to the debate are the use of trade policies to support farm
incomes and a number instruments classified as domestic supports. The
instruments being debated include administered prices, the level of the rice
tariff, the type of tariff, whether to reintroduce sole importer status for
BULOG, some combination of tariff and state trading, and how the various policy
levers will link to stabilize prices. In recent months, the rice policy debate
has intensified because of inconsistencies in the application of current policy
instruments.[81] How it is resolved could
greatly affect Indonesias position towards the agricultural negotiations
in the WTO.

5 Issues of concern in further
negotiations on agriculture

Indonesia has taken a strong position in favour of SDT for
developing countries during the current round of agricultural
negotiations.[82] As is typical of other
developing countries, Indonesias proposals refer to policy
objectives, not to specific measures or types of policies. Indonesia has
proposed a list of objectives that would fall under the SDT provisions of the
Agreement. These include agriculture and rural development, poverty alleviation
and food security, where Indonesias definition of food security
encompasses not only accessibility to foodstuffs but also the ability to produce
Indonesias own food needs. Indonesia also supports the objectives proposed
by other developing countries, including support for low-income and
resource-poor farmers, rural employment and diversification of agriculture.
Finally, Indonesia has proposed that the concept of SDT be broadened to address
the fundamental problems of development and growth in developing
countries.

Indonesia proposes that all measures used by developing
countries to meet SDT objectives be excluded from WTO disciplines. If not
excluded, Indonesia would argue that developing countries should have
considerable flexibility in the applications of the rules. Flexibility in this
case refers not only to a longer time frame for reform but also to the nature
and depth of the commitments.

With respect to specific negotiating areas, issues of concern
to Indonesia might be as follows.

5.1 Import access

One of Indonesias principal goals during the current
round of negotiations might be to maintain and open up markets for its export
commodities. For example, Indonesia strongly advocates the elimination of tariff
peaks, NTBs and tariff escalation on products of interest to developing
countries. This includes tropical products. The elimination of tariff escalation
is especially important to Indonesia now that it has removed export taxes.
Export taxes are one means to counter tariff escalation in other
countries.

Indonesia might also favour linking concessions in agriculture
to concessions in other negotiating areas, such as anti-dumping and
countervailing duties. Indonesia has been subject to a large number of
anti-dumping actions and views these as disguised protectionist policies that
are practised mostly by developed countries. In addition to lost trade,
Indonesia often complains about the huge legal costs associated with the
implementation of WTO rules, particularly those pertaining to anti-dumping and
other trade remedies. Improved rules which, for example, limit the use of
anti-dumping measures to clear cases of predatory pricing is an area where
Indonesian negotiators see clear benefits for the Indonesian economy. Indonesia
is also concerned about the possible use of sanitary/phytosanitary measures as
disguised forms of protectionism, and favours improved transparency and
harmonization.

With regards to Indonesias own trade policies, applied
tariffs have been reduced by two-thirds during the past six years, and most NTBs
have been eliminated. As a result, the agricultural sector is fairly open to
foreign trade. Even if Indonesia wishes to preserve the flexibility to increase
tariffs in the future, it could still offer to reduce its own tariff bindings in
return for meaningful market opening measures by other countries. Tariff
bindings would have to fall by a considerable extent before approaching applied
rates. Indonesia has also adopted the position that reciprocity for tariff
reductions made by developed countries should not be required of developing
countries, when this is inconsistent with their development, financial,
and trade needs, when the objective is to protect subsistence farmers, or
when the goal is food security.

5.2 Domestic supports

Indonesia supports various proposals to allow developing
countries greater flexibility to exclude from reduction commitments those
measures that are used for food security, rural development, etc. Indonesia
proposes that the Green Box be expanded to include such measures.

As noted earlier, Indonesia is now in the process of debating
its policies on rice. Included in the debate are policy measures which would be
classified as domestic supports and which might be included in the AMS. Since
Indonesia did not submit a commitment on the AMS, it could be constrained in its
ability to use such measures in the future. Like other developing countries,
Indonesia feels that the Agreement is biased in this regard. By not making a
commitment on the AMS, Indonesia may come under more disciplines than those
countries where domestic subsidies are far more prevalent. The policies of
interest to Indonesia include stockholding for food security, and the
administered price systems needed to make such programmes operational.

5.3 Export subsidies

Indonesia has proposed that all export subsidies used by
developed countries be eliminated. Even though Indonesia states that it does not
intend to use export subsidies in the future, it does propose that developing
countries retain the existing flexibility to use such subsidies.

5.4 Export taxes and other restraints

Indonesia holds the view that no changes in Article 12 are
necessary. If there are modifications, these should not undermine the SDT
provisions of the Article. Indonesia reports that it has occasionally used
export taxes because of critical food shortages and to conserve natural
resources.

5.5 Special safeguards

Indonesia proposes that the special safeguard be eliminated
for developed countries. For developing countries, Indonesia proposes that the
special safeguard be made more widely available, irrespective of whether NTBs
were converted into tariffs. The safeguard could be used to protect
domestic production from import surges or a decline in prices and
would qualify as a measure for food security. Indonesia apparently favours the
special safeguard since it operates mechanistically without proof of injury. As
noted earlier, Indonesia does not yet have a general safeguard
mechanism.

6 Conclusions

The AoA appears to have placed very few practical constraints
on Indonesian policy-makers. Nevertheless, Indonesia is now reconsidering its
agricultural policies, and the results of this debate could significantly affect
Indonesias position in the agricultural negotiations. The debate within
Indonesia centres on food security and the policy instruments that might be used
to stabilize and possibly support domestic agricultural prices.

The political economy of agriculture is such that developed
countries tend to support farm incomes, while developing countries are equally
concerned with price stabilization. The domestic support part of the AoA is
oriented towards the types of policies traditionally used by developed
countries. These policies typically have an on-budget financial exposure that
developing countries can ill afford. Price-stabilization policies, however,
often operate in conjunction with trade policies and have less on-budget
financial exposure.[83] WTO rules governing the
use of such policies appear unclear.

Major issues during the current round of agricultural
negotiations are likely to be very similar to those of the UR and include market
access, export subsidies and domestic supports. Where developing countries
desire special and differential treatment with respect to market access in
developed countries, it might be best to frame SDT in terms of specific
commitments. Where developing countries desire greater flexibility in their own
commitments, it might be best to frame this flexibility in terms of policy
measures and criteria, rather than policy objectives. The development of
specific criteria for permitted agricultural programmes was one of the hallmarks
of the AoA. It is therefore difficult to envision how developing countries could
receive blanket approval to omit policies from disciplines based solely on the
objective of the policy.

One of Indonesias major goals during the negotiations
might be to open up markets for its export commodities. Indonesias own
agricultural markets are now fairly open to foreign trade, and Indonesias
tariff bindings are quite high. As a result, Indonesia could easily offer to
reduce its bindings in return for meaningful market opening measures by other
countries. Indonesia might also favour linking concessions in agriculture to
concessions in other negotiating areas, such as improved rules on the use of
antidumping and countervailing duties.

References

Arifin, B., Munir, A., Hartati, E.S. & Rachbini, D.J.
2001. Food security and markets in Indonesia. Report for the Management
and Organization Development for Empowerment, Inc. and the Southeast Asia
Council for Food Security and Fair Trade.

World Bank. 2001. Indonesia: The imperative for reform.
Brief for the Consultative Group on Indonesia, November.

[62] Study prepared for FAO
by Stephen L. Magiera, Trade and Telecommunications Advisor for Nathan
Associates in Indonesias Ministry of Industry and Trade. The views
expressed in this paper are those of the author and are not necessarily those of
Nathan Associates or the Indonesian Government.[63] Agricultural GDP
includes forestry and fisheries. Macroeconomic data are from various World Bank
reports on Indonesia.[64] The discussion on market
access is based on Magiera (2000b, 2001).[65] Indonesias
commitments with the IMF are tied to specific loans with an implementation
period ending in December 2002. In those cases where the reforms go beyond
Indonesias international commitments, Indonesia would be free to revoke
the reforms after it graduates from the IMF programme.[66] Although Indonesia is
free to restrict consumption of alcoholic beverages for religious or other
reasons, some argue that such restrictions should apply equally to domestic and
foreign-produced alcohol.[67] At the conclusion of the
UR, Indonesia eliminated import licences for garlic and transferred the right to
import to BULOG, which could then reassign that right back to the previous
licence holders.[68] Authors
calculations. Information on Indonesias applied and bound tariffs is also
contained in the tariff analysis tables submitted by Indonesia as part of its
APEC action plan.[69] Although the Pakmei
schedule is not the result of an international commitment, Indonesia did
incorporate the schedule into its APEC action plan. At the Bogor and Osaka
Leaders Meetings of 1994 and 1995, APEC countries agreed to a long-term
goal of free trade, and to submit annual action plans, which outline their
liberalization initiatives. Indonesia is one of the few countries to lay out a
tariff reduction formula for meeting APECs long-term goal of free trade.
The Government has been fairly faithful at reducing tariffs in accordance with
the Pakmei schedule. However, there has been slippage, which has worsened over
time.[70] In addition, the
Government provides subsidized credits to farmers and, until recently,
subsidized the use of fertilizers and pesticides. Direct subsidies on the use of
fertilizers and pesticides have been eliminated, but urea fertilizer may still
benefit from subsidies on the use of natural gas in urea production.[71] In 1998, export taxes
and other types of export restrictions affected a fairly large number of items
in the forestry and textiles sectors. Indonesias commitment to the IMF
does not include the elimination of those export restrictions that are used to
enforce MFA quotas in the markets of developed countries.[72] The numbers in
parentheses indicate the product share in Indonesias total agricultural
exports in 1998-2000.[73] The numbers in
parentheses indicate the product share in Indonesias total agricultural
imports in 1998-2000.[74] We use a later end date
for imports/exports (1999) than for tariffs (1998) because of the lag between a
change in tariffs and the expected impact on trade.[75] Within manufacturing,
only a few sectors experienced a declining trade balance between 1994 and 1999
(plywood, footwear and jewellery). In all such cases, the decline was due to
decreased exports, not to increased imports (Magiera, 2000a).[76] As a result, Indonesia
has fallen behind other Asian countries, particularly Thailand, in the
development of its agribusiness sector.[77] Considerable amounts of
information can be lost during the tariff averaging process. Thus, there could
be cases of extremely high tariff escalation within product categories that have
a low average escalation.[78] Indonesia was not a
party to the WTO panel decision on turtle excluders. In 2001, the United States
prohibited imports of Indonesian shrimps because of the improper use of
excluders.[79] While requirements for
advance notice of changes to standards and the establishment of points of
enquiry are positive steps towards greater transparency, Indonesian officials
still have difficulty in accessing timely information. In the Government agency
handling sanitary/phytosanitary regulations, there is one Internet access point
for 75 staff members.[80] Many of Indonesias
manufacturing exports have a very high import content. Since imported inputs are
required to produce these exports, Figure 3 overestimates the amount of foreign
exchange available to import food. Also, Indonesia has a huge domestic debt of
US$73 billion. Interest payments on this debt are three times that on foreign
debt and have necessitated donor support to help finance the state
budget.[81] Following the sharp
depreciation of the rupiah, the Government raised the floor price for rice on
several occasions. On the last such occasion, it may have overshot the level
that could be supported. BULOGs monopoly over imports had been eliminated
and replaced with a specific tariff of Rp430/kg, or 30 percent ad
valorem. This tariff turned out to be too low to keep imported rice from
flooding the market at less than the intervention price. At the same time, BULOG
maintained its role in stabilizing prices, but no longer had the budgetary
resources needed to intervene in the market, either on a seasonal basis or to
prevent prices from falling towards the world price plus tariff. Rampant
smuggling may have aggravated the problem by causing prices to fall to less than
the world price plus tariff. In the end, BULOG could no longer defend the floor
price and might even have purchased imported rice from the domestic market as
part of its market intervention activities.[82] See the statement by
Indonesia at the Fourth Special Session of the Committee on Agriculture, 15
November 2000, WTO Document G/AG/NG/W/71. Indonesia also generally supports
proposals of other developing countries for special and differential treatment,
including the proposal by ASEAN in November 2000 (G/AG/NG/W/80) and India in
January 2001 (G/AG/NG/W/102).[83] The fact that a policy
has little or no financial cost to the Government does not imply that the
policys cost to the economy is less than one with significant financial
cost. Trade policies can generate revenues for the budget but are typically far
more costly to the economy than direct government payments.